Meet the New GM, Same as the Old GM… According to Federal Courts

This week, Craig Ashton, Ed Schade, and Tim Hodson discussed GM’s recent legal setback with regard to their faulty ignition switches, and commiserated about what the outlook is for the embattled car company.

Craig Ashton kicked off by quickly summarizing GM’s recent history: “…General Motors emerged from bankruptcy in 2009. They were pretty much crushed by the global financial crisis [and] filed for bankruptcy. [A few years later, they] had a problem with their ignition switches slipping out of the ‘run’ position and shutting off the engine, knocking out the power steering, power brakes, and airbags. And they’re responsible for crashes that killed at least 169 people and injured hundreds of others.

“So, their new CEO basically took a new tack which is—which I kind of applaud—she basically owned it. She said, ‘Look, we’re aware of the problem, we’re sorry about the problem, we’re going to fix the problem, and we own the problem.’

“I think the reason she was doing that is she believed that because quote-unquote ‘the old GM’ was the perpetrator of this products liability cause of action, and ultimately was responsible for the ignition switches. [Therefore,] that behavior would not be carried over to the quote-unquote ‘the new GM.’

“Well, a federal bankruptcy judge this week basically disagreed. He said on Monday that employees and knowledge transfer from the old GM to the new company essentially makes the new company responsible, and if the plaintiffs can prove that the new GM knew of the faulty switches, but covered it up, then even though the old GM was the one that started the process, it transfers over, and punitive damages can be sought. Well, you can probably expect that Robert Hilliard, who’s representing a bunch of the plaintiffs, was pretty happy with that. And he’s now posturing and saying, ‘Look, punitive damages, GM’s already owned it with the Justice Department.’ GM basically said, ‘We knew about it, and we covered it up.’ So, based upon the fact that that is something that they did in their plea deal, they can’t walk that back anymore. I think GM’s in significant trouble here, in a products liability cause of action.

Ed Schade stepped in to explain the backstory of GM’s previous settlement: “[The new GM] entered into an agreement to settle criminal charges with the Justice Department… for stuff that the quote-unquote ‘old GM’ did. And so, now all they have to do is, it’s collateral estoppel for the plaintiffs. [Collateral estoppel means that once a court has made a ruling on something, you can’t go back and argue the point in a later case.] You can’t [get] out of the criminal charges by admitting this, and [then] say that it no longer exists. It’s de facto done. Now it’s [a matter of] carrying it over and start going for damages.”

Tim Hodson then read the writing on the wall, saying, “Yeah, that was an extremely huge victory for that attorney and the other attorneys involved in these lawsuits. It’s almost a slam dunk at this point.”

Craig ticked off the boxes as to why GM is likely going to be writing a large check in the near future. “Punitive damages happen when it’s malicious, egregious, or fraudulent. And the cover-up is a fraud, and the malicious or egregious is, ‘Hey, if you knew about this, and people are dying, and you’re not recalling the vehicles…’ Then that led to the criminal charges, and the standard is different, it’s beyond a reasonable doubt versus preponderance of the evidence, [and despite the higher standard for the criminal case, there was still enough evidence to compel GM to settle]. And so… yeah, this is not going to be good for GM, I don’t think.”

With a few words, Hodson aptly painted a picture of the kind of legal and PR nightmare that GM would be facing if the case were to go to court: “You don’t want that testimony: ‘So, how many deaths would it have taken before you told us this was a problem?’ You don’t want that question being asked on public record. It would be very smart for new GM to take care of this quickly.”

Ed jumped onto the already quite crowded “GM is in deep, deep trouble” train by explaining that, “The interesting thing is… you go through bankruptcy, and you come out the other side cleansed and reborn… the new GM. But punitive damages are non-dischargeable, so that would carry right through the bankruptcy, and that’s what going on here.”

Craig: “Yeah, and GM’s doing much, much better, so, you know their balance sheet is looking much better, and it’s going to be difficult for them to file for bankruptcy again, based upon the fact that they’re doing so much better financially.”

Just in case any of GM’s lawyers were listening in and had started to fantasize about ways to successfully declare bankruptcy again despite Ashton’s last point, Ed was quick to jump in and rain on their parade: “And it’s a non-dischargeable claim, in any event. Even if they did declare bankruptcy, you can’t discharge punitive damages claims.”

Tim Hodson closed the discussion by offering a bit of informal legal advice to the execs at GM: “If anyone’s smart in that company, they [better] start putting money on the table now.”

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